May 5, 2014
Executives
Bruce Rosenbloom - Chief Financial Officer, Principal Accounting Officer and Treasurer Mendo Akdag - President and Chief Executive Officer
Analysts
Kevin Ellich - Piper Jaffray Michael Kupinski - Noble Financial Erin Wilson - Bank of America Ross Taylor - CL King Mitch Bartlett - Craig-Hallum Anthony Lebiedzinski - Sidoti
Operator
Welcome to the PetMed Express, Inc., doing business as 1-800-PetMeds, Conference Call to review the Financial Results for the Fourth Fiscal Quarter and Fiscal Year Ended on March 31, 2014. At the request of the company, this conference is being recorded.
Founded in 1996, 1-800-PetMeds is America's largest pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs and cats direct to the customer. 1-800-PetMeds markets its products through national television, online, direct mail and print advertising campaigns, which direct consumers to order by phone or on the internet and aim to increase the recognition of the PetMed's family of brand names.
1-800-PetMeds provides an attractive alternative for obtaining pet medications in terms of convenience, price, ease of ordering and rapid home delivery. At this time, I would like to turn the call over to the company's Chief Financial Officer, Mr.
Bruce Rosenbloom. You may begin, sir.
Bruce Rosenbloom
Thank you. I'd like to welcome everybody here today.
Before I turn the call over to Mendo Akdag, our President and Chief Executive Officer, I would like to remind everyone that the first portion of this conference call will be listen only until the question-and-answer session which will be later in the call. Also, certain information that will be included in this press conference may include forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission that may involve a number of risks and uncertainties.
These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions.
Actual future results may vary significantly based on a number of factors that may cause the actual results or events to be materially different from future results, performance or achievements expressed or implied by these statements. We've identified various risk factors associated with our operations in our most recent annual report and other filings with the Securities and Exchange Commission.
Now let me introduce today's speaker, Mendo Akdag, President and Chief Executive Officer of 1-800-PetMeds. Mendo?
Mendo Akdag
Thank you, Bruce. Welcome, everyone.
Thank you for joining us. Today we will review the highlights of our financial results.
We will compare our fourth fiscal quarter and fiscal year ended on March 31, 2014, to last year's quarter and fiscal year ended on March 31, 2013. For the fourth fiscal quarter ended on March 31, 2014, our sales were $48.6 million compared to sales $51.1 million for the same period of the prior year, a decrease of 4.9%.
For the fiscal year ended on March 31, 2014, sales were $233.4 million compared to $227.8 million for the prior fiscal year, an increase of 2.4%. The sales for the quarter were negatively impacted by the cold and difficult weather conditions.
The average order was approximately $77 for the quarter compared to $75 for the same quarter of the prior year. And it was $75 for the fiscal year compared to $73 for the prior fiscal year.
The increase in average order value was mainly due to change in product mix to a higher priced item. For the fourth fiscal quarter, net income was relatively flat at $4.5 million or $0.23 diluted per share compared to $4.6 million or $0.23 diluted per share for the same quarter of the prior year.
For the fiscal year, net income was $18 million or $0.90 diluted per share compared to $17.3 million or $0.86 diluted per share a year ago, an increase to earnings per share of 4.7%. Reorder sales decreased by 3.4% to $41 million for the quarter compared to reorder sales of $42.4 million for the same quarter of the prior year.
The cold weather negatively impacted the quarter. For the fiscal year, reorder sales increased by 3.5% to $191.2 million compared to $184.8 million for the prior year.
New order sales decreased by 11% to $7.7 million for the quarter compared to $8.7 million for the same period of the prior year. For the fiscal year, new order sales decreased by 1.9% to $42.2 million compared to $43 million for the prior year.
The decrease for the quarter was mainly due to an increase in customer acquisition cost. We acquired approximately 107,000 new customers in our fourth fiscal quarter compared to 125,000 for the same period of the prior year.
And we acquired approximately 597,000 new customers in the fiscal year compared to 630,000 for the prior year. For the quarter, approximately 80% of our sales were generated on our website compared to 79% for the same period of the prior year.
And for the year, it was 79% compared to 77% for the prior year. The seasonality in our business is due to the proportion of flea, tick and heartworm medications in our product mix.
Spring and summer are considered peak seasons, with fall and winter being the off seasons. For the fourth fiscal quarter, our gross profit as a percent of sales improved to 35.9% compared to 35.7% for the same period a year ago.
For the fiscal year, our gross profit as a percent of sales was 33.3% compared to 33.9% for the prior year. The percentage increase for the quarter was mainly due to cost reduction in certain brands.
The percentage decrease for the fiscal year can be attributed to increases in product cost and additional discounts given to customers. Our general and administrative expenses as a percent of sales were 10% for the quarter compared to 10.1% for the same quarter of the prior year.
For the fiscal year, the G&A was at 9.2% compared to 9.5% for the prior year. We were able to leverage the G&A.
For the quarter, we spent $5.3 million in advertising compared to $5.6 million for the same quarter of the prior year, a decrease of about 5%. For the fiscal year, our spending was relatively flat at $27.2 million for advertising compared to $27.4 million for the prior fiscal year.
Advertising cost of acquiring a customer for the quarter was approximately $49 compared to $44 for the same quarter of the prior year. And for the fiscal year, it was $46 compared to $44 for the prior fiscal year.
The increase was due to higher costs and softer demand. We had $33.8 million in cash and short-term investments and $35.7 million in inventory, with no debt as of March 31, 2014.
The increase in inventory was due to promotional buying opportunities. Net cash from operations for the fiscal year was $13.5 million compared to $13.3 million for the prior fiscal year.
This ends the financial review. Operator, we are ready to take questions.
Operator
(Operator Instructions) And our first question comes from Kevin Ellich with Piper Jaffray.
Kevin Ellich - Piper Jaffray
Mendo, just wanted to go back. Did you say new customers added during the quarter was 107,000?
Is that right?
Mendo Akdag
That is correct, yes.
Kevin Ellich - Piper Jaffray
So looking at customer acquisition cost coming in at $49, it looks like the last couple of quarters, we've seen it grow over 10%. It was up by about 12%, 13% last quarter.
Is this kind of the pace of growth? Is it going to increase this much going forward?
And I guess what are you guys expecting?
Mendo Akdag
Overall, we are anticipating the cost per impression to grow up slightly in the current fiscal year. But the last two quarters, you have to take into account that it was our off-peak season.
And most of the increase was due to higher cost and also some of the softer demand.
Kevin Ellich - Piper Jaffray
So when you say up slightly, are we talking more single-digits or can you help us out there?
Mendo Akdag
As far as the cost, high-single digits.
Kevin Ellich - Piper Jaffray
You did a good job on the gross margin improvement. In the press release, you called out saying products where you saw cost reductions.
Is there any category or a specific product line you can talk about where you guys saw those improvements?
Mendo Akdag
We're not going to comment on that due to competitive reasons.
Kevin Ellich - Piper Jaffray
Do you expect the gross margins to stay at these levels or how should we think about that as we adjust our models?
Mendo Akdag
It should follow the similar trend as the last year. It's typically lower in the June quarter.
And on the peak season, I should say usually our gross profit is lower due to product mix. It should follow the same trend as quarter-to-quarter the last fiscal year.
We're going to attempt to keep it the same and attempt to improve it. But obviously market conditions will also impact it, depends on how competitive the pricing is in the market.
Kevin Ellich - Piper Jaffray
Two last quick questions from me. One, you called it out in the press release again due to the cold winter and maybe delayed flea and tick season and heartworm, but have you see any pickup here in April and did whether it cause any delay in shipments during the quarter?
And then lastly, in 2015, you called out planning to focus on new order sales. Is there anything specifically you plan to implement or strategically what are you going to do to drive new order sales?
Mendo Akdag
I'll start with your last question. As far as focusing on new order sales, we are putting more resources on it to attempt to improve it.
So we're going to launch a new campaign. We'll see how that performs.
As far as the quarter is concerned, time-to-time, there were some shipping delays due to the difficult weather conditions.
Kevin Ellich - Piper Jaffray
And then have you seen a pickup here in April now that we are kind of very in the heart of flea and tick, heartworm season?
Mendo Akdag
Yeah, for me to comment on the current quarter could be misleading since we still have two more months to go. So we prefer to talk about the current quarter in July.
Operator
Our next question comes from Michael Kupinski with Noble Financial.
Michael Kupinski - Noble Financial
I know last year you guys did very heavy promotions, something that you kind of were outside of the box. And I was just wondering and I know that you always do promotions.
But in terms of the variances in terms of the promotions this year versus last year, were the promotions just not as effective or what were your thoughts in terms of the promotions this year versus last year?
Mendo Akdag
Are you talking about the last fiscal year or are you talking about the current fiscal year?
Michael Kupinski - Noble Financial
The last fiscal fourth quarter last year versus this year.
Mendo Akdag
Our promotions were similar to the prior year. There wasn't much difference.
We had a little bit more, but it was fairly similar.
Michael Kupinski - Noble Financial
When I look at cost landscape a bit out of your various flea and tick products available on the internet, seems that you are not the lower price option. I was just wondering if you can chat a little bit about the price competition that's in the marketplace and if you can also talk to me a little bit about in terms of customers, what they're looking for when they go on the internet?
Are they looking for convenience or are they looking for price?
Mendo Akdag
Depends on a customer. Obviously certain portion of the customers are going to be looking for convenience and certain portion are going to be looking for price or both.
But tick topicals are very competitive and the market is crowded and it has been for a while. We do survey the market.
We believe overall we are competitive.
Michael Kupinski - Noble Financial
And with the advertising spending down over the last quarter, are you reviewing the content or is this solely a function of the price of television advertising right now versus the revenue return?
Mendo Akdag
With the content, I assume you're talking about the creatives that we are using?
Michael Kupinski - Noble Financial
Yes.
Mendo Akdag
Yes, we are reviewing the creatives. We put additional resources into it.
So we'll be testing different creatives and even different stations and media to see if we can improve the order sales.
Michael Kupinski - Noble Financial
And with that, do you think that that would be effective in this quarter where you would see that, because obviously I would think that you would want to kind of step up on the advertising a little bit if possible. So are you anticipating the advertising spend to kind of increase in the quarter?
Mendo Akdag
We have budgeted higher dollars for the quarter, where we'll see if we can spend it efficiently. Yes, we do have new creatives coming up.
We're going to launch it actually next week. So depends on how it does, it may impact the quarter.
Michael Kupinski - Noble Financial
And kind of an off-the-wall question, but does the extreme weather affect flea and tick sales? For instance, with the extreme weather and the wintery weather in the last quarter, does that necessarily mean maybe that flea and ticks are not as prominent in this season, because of the winter weather?
Mendo Akdag
Of course, it does, yes.
Michael Kupinski - Noble Financial
So in other words, the flea and tick is not going to be as severe, in other words, right?
Mendo Akdag
That is correct, yes.
Operator
Our next question comes from Erin Wilson with Bank of America.
Erin Wilson - Bank of America
As it relates to product procurement, can you speak to the potential implications of industry consolidation with Eli Lilly and Novartis combining here, particularly in light of the fluctuations that you saw with Novartis (inaudible) historically?
Mendo Akdag
Our vendor relationships are confidential and proprietary. So I'm not at liberty to comment on that.
Erin Wilson - Bank of America
Right, but what historically has been the implications of broader industry consolidation from a vendor standpoint?
Mendo Akdag
It has not had much of an impact so far. But it doesn't mean that will not be the case going forward.
Erin Wilson - Bank of America
And looking at your cash conversion cycle, inventories were significantly higher sequentially and year-over-year. Would this be a function of seasonality or attributable to some sort of fundamental shift, or is this just opportunistic inventory build in the quarter?
Mendo Akdag
Opportunistic inventory build in the quarter. When there is a cost advantage, it will carry higher inventory.
Erin Wilson - Bank of America
And just broadly speaking, where are you seeing the most competition from now or new competition? Is this the online retailers?
Is it big box retailers, human pharmacies or the traditional vet clinic?
Mendo Akdag
Really the competition is on the flea and tick topicals is where the market is very competitive. And both online and big box retailers are impacting it.
Operator
Our next question comes from Ross Taylor with CL King.
Ross Taylor - CL King
I know on an annual basis, you typically disclose what your mix of prescription revenues was for the year. And now that the fiscal year is over, I just wondered if you have that for fiscal year 2014?
Mendo Akdag
Yes, we do. The prescriptions were 44% of the sales compared to 40% in the prior fiscal year.
Ross Taylor - CL King
That's a big change. Can you talk about any product categories that really drove that mix shift?
Mendo Akdag
There is this shift and so the prescription business grew double-digit. But I'm not going to comment as far as categories are concerned.
Ross Taylor - CL King
And somebody else might have tried to drill down into this on an earlier question, but you mentioned some cost reductions on certain brands. Can you talk about kind of what general categories they were in, whether it was flea and tick, prescription versus OTC, or anything like that?
Mendo Akdag
Again, due to competitive reasons, we're not going to comment on that question.
Ross Taylor - CL King
And the final question, can you guys share any thoughts on what some of the new medications, particularly NexGard, I mean what kind of impact you can foresee that having on your business? I mean it does look like the price points are quite a bit higher than, say, for the Frontline.
But I just wondered how you think that might impact your business over the next two or three years?
Mendo Akdag
It should impact it positively. It's a pill.
So it's more convenient for the customers compared to the topical. And so we anticipate it will impact it positively.
Operator
Our next question comes from Mitch Bartlett with Craig-Hallum.
Mitch Bartlett - Craig-Hallum
Yeah, I think you've tried to fend off a little of the gross margin analysis on mix. It seems from your commentary and from what's obvious from the weather that flea and tick was probably weak in the quarter and prescriptions were strong.
Can you give us a measure of how much gross margins benefited just from pure mix shift between those two broad categories?
Mendo Akdag
Anytime the flea and tick is weak, the flea and tick has the topicals, I should say, flea and tick topicals are the lowest margins. So anytime that's weak, the overall gross profit percent is going to benefit from it.
And you see that every year. It's really, really March quarter.
So you should really look at it each quarter separately. If you look at prior years, it's similar results.
Mitch Bartlett - Craig-Hallum
So the full year was 4% more prescriptions. I bet the fourth quarter was a little more weighted towards prescriptions than even that 4% shift that probably benefited the gross margin is what you're saying?
Mendo Akdag
Somewhat, but we did better as far as the buying is concerned. There were cost reductions on certain brands during the quarter that helped it.
Mitch Bartlett - Craig-Hallum
And the inventory build presumably benefits from those opportunity buys as well for the next quarter?
Mendo Akdag
That is correct, yes.
Mitch Bartlett - Craig-Hallum
Just interested in kind of the active base of customers. What has happened over the last few years?
It's been a hard thaw to get new customers on board, and you've done a phenomenal job with the base of customers and keeping those orders. But is the total base of active customers continuing to erode a little bit as you haven't replenished the base?
Mendo Akdag
Slightly maybe. I would say it's pretty much flat.
Mitch Bartlett - Craig-Hallum
Just in pure activity year-over-year?
Mendo Akdag
Right.
Operator
Our next comes from Anthony Lebiedzinski with Sidoti.
Anthony Lebiedzinski - Sidoti
My first question is on the average order value. You said that this was a function of a change in product mix.
Just wondering if you can give us some examples of some of this, and also do you think this trend is sustainable in fiscal '15?
Mendo Akdag
The trend is probably going to continue. And as I've already the prescription business growth, there is a shift in prescription.
Anthony Lebiedzinski - Sidoti
And as far as fiscal '15, your advertising budget, is it going to be allocated in a similar way to TV versus online and other media mix, or are you looking to make any changes to how you allocate your advertising dollars in terms of whether it's maybe more online, maybe less TV? What are your thoughts on that?
Mendo Akdag
It will probably be a similar mix. That's what we're planning so far.
Our marketing approach has been multi-channel. And the channels complement each other.
It's difficult to shift dollars to other channels in a cost effective manner
Anthony Lebiedzinski - Sidoti
Lastly, can you give us any update on a new facility? I know the current facility that you're in, the lease expires next year.
Have you made a decision where you'll move, or is that still something you're working on?
Mendo Akdag
We're going to delay it, it looks like, by about a year to 18 months.
Anthony Lebiedzinski - Sidoti
So you're going to sign the lease extension on your current facility?
Mendo Akdag
That is correct, yes.
Operator
Our final question comes from Kevin Ellich with Piper Jaffray.
Kevin Ellich - Piper Jaffray
Mendo, two last questions here. Going back to the last question on the delay of the new facility, I guess what led you guys to delay this by a year to 18 months?
And then the other question I had, with the new products coming to market like NexGard and Apoquel, which is on back order now, I guess how confident are you that you'll be able to obtain adequate supply once manufacturing capacity is back on line, since I think some of these new products have track and trace technology?
Mendo Akdag
The first question as far the delay is concerned, we're working on upgrading our software. And we did not want to also make a move at the same time, so that's the reason for the delay.
We're going to do one at a time. As far as your next question is concerned, our history has been we're going to be able to get the product, but that doesn't mean we're not going to have challenges going forward.
Operator
And at this time, I'll turn the call back over to Mendo Akdag
Mendo Akdag
Thank you. For the fiscal year 2015, we are focusing on improving our new order sales.
This wraps up today's conference call. Thank you for joining us.
Operator, this ends the conference call.
Operator
Thank you. Thank you for participating in today's call.
You may now disconnect your lines.